USD Vol: Implieds jolt higher with UST rally

Implieds jolt higher with UST rally 

Treasuries have stayed higher in a bull steepening move that ensued after a drop in JOLTS job openings. Realizeds increased with the data-driven move, as swap rates dropped double digits in the front end of the curve.

The vol surface sprung higher with the underlying rally and a source noted that the move has been on “pretty low volumes.” In term of price action, the trader noted that “the better bid started yesterday, but it was better offered this morning until JOLTs got the rally started.”

3m expiries are anywhere from around 3 to 14 normals higher, led by the left, while 1y expiries are around 1 to 5 normals firmer and longer expiries are roughly 0.1 to 0.5 normal higher on the day.

Interbank activity has been relatively light. In the ULC, 2y1y traded at 153bps, 3m2y dealt at 136bps this morning and then dealt at 144bps later, 1y2y traded at 232bps, 3y2y traded at 325bps in good size recently. Earlier in the session, 2y2y traded at 282bps but is now around 288bps mid.

In 5y tails, 3m5y traded recently at 280bps and 1m5y traded this morning at 169bps but is now around 177bps or roughly 14 normals higher on the day. Further to the right, 1m10y dealt at 268bps and in longer expiries, 1y10y traded at 756bps, 3y10y traded at 1177bps and 10y10y at 1592bps, with some of the 3y10y/10y10y possibly as a switch. Also, a 3y2y/3y5y/3y10y may have dealt as a fly at 325bps, 700bps and 1176bps, according to the SDR.

In skew, 6m1y 100bp each way risk reversal traded at -9.5bps and 6m30y 50bp each way traded at -6bps, according to the SDR. Late yesterday, 3m10y 50bp each way risk reversal dealt at -7bps, according to the SDR.  

For USD option trades on the SDR see here and for volumes please see here.  

Stay long vol due to myriad reasons – JP Morgan

While there were positive signs that the banking crisis seems to be abating and markets seem to be stabilizing, analysts at JP Morgan see “good reasons to expect long volatility positions to continue to outperform” in the near-term.

For one, JP Morgan highlights that “policy uncertainty remains extremely high to the extent that it is even unclear whether we are still in a hiking cycle or whether we're about to enter into an easing cycle. As the banking sector crisis enters a more chronic phase, there will likely be growing uncertainty about the tightening being delivered into the system via credit contraction.” 

Comparing the daily changes in rates in March versus what would be expected under a normal distribution, JP Morgan sees that they were “far in excess, both in size and in frequency, of what would be expected under a normal distribution.”  Thus, “these fat tails, which skew a bit to the left but are nevertheless pronounced in both directions, point to the fact that current yield levels reflect an uneasy equilibrium between very different possible states of the world” and the bank believes that “fat tails, large moves and increased jump risk are likely to be a mainstay of markets for some time.”

Moreover, the bank finds that “the non-linear nature of option gamma payoffs means that elevated jump risk can significantly lower the volatility needed on non-jump days to break even on a long straddle position.” For example, looking at jump risk over the past month, JP Morgan finds in its analysis that there is “room for jump frequencies to fall, or non-jump-day-vol to decline, before long volatility positions stop outperforming” and that selling volatility during high "jump risk" times “may not be profitable, despite the temptation offered by elevated implieds.”

Last but not least, JP Morgan finds that market depth “continues to plumb new depths, and recovery has been weak at best.” Thus, “given the greater policy uncertainty, conditions are not yet ripe for a sustained and/or significant improvement," JP Morgan assesses.  

New structured notes

For a complete review of USD MTN activity over the past week, please see USD MTNs.

• JP Morgan is working on a self-led CMS-linked note maturing Apr 2038 NC7 that pays 9.35% for the first two years and then pays a coupon linked to CMS30y, floored at zero. EMTN.  

   

• Credit Agricole is working on a self-led CMS-linked quanto maturing Apr 2038 NC7 that pays 8.52% for the first two years and then paya a coupon tied to the 30y Euribor ICE swap rate, floored at zero. EMTN.

   

• Credit Industriel et Commercial is working on a self-led CMS-linked note maturing Apr 2038 NC7 that pays 10.5% for the first two years and then pays a coupon linked to CMS30y, floored at zero. EMTN.  

   

• Toronto Dominion is working on a self-led fixed callable maturing Apr 2025 NC6m that pays 5.35%. GMTN.